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Was Prometheus Unbound by Chance? Risk, Diversification, and Growth

  • Acemoglu, Daron
  • Zilibotti, Fabrizio

This paper offers a theory of development that links the degree of market incompleteness to capital accumulation and growth. Because sectoral indivisibilities limit the extent of diversification, poor economies suffer higher volatility of growth and endogenously lower productivity. As the economy develops, agents hold more balanced portfolios and can take better advantage of high-return production opportunities. Although all agents are price takers and there are no technological spillovers, the decentralized equilibrium is inefficient because individuals do not internalize the impact of their investment decisions on others' diversification opportunities. The results generalize to economies with international capital flows. Copyright 1997 by the University of Chicago.

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File URL: http://dx.doi.org/10.1086/262091
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Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 105 (1997)
Issue (Month): 4 (August)
Pages: 709-51

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Handle: RePEc:ucp:jpolec:v:105:y:1997:i:4:p:709-51
Contact details of provider: Web page: http://www.journals.uchicago.edu/JPE/

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  1. Jeremy Greenwood & Boyan Jovanovic, 1989. "Financial Development, Growth, and the Distribution of Income," NBER Working Papers 3189, National Bureau of Economic Research, Inc.
  2. Garey Ramey & Valerie A. Ramey, 1994. "Cross-Country Evidence on the Link Between Volatility and Growth," NBER Working Papers 4959, National Bureau of Economic Research, Inc.
  3. Saint-Paul, Gilles, 1992. "Technological choice, financial markets and economic development," European Economic Review, Elsevier, vol. 36(4), pages 763-781, May.
  4. John H. Boyd & Edward C. Prescott, 1985. "Financial intermediary-coalitions," Staff Report 87, Federal Reserve Bank of Minneapolis.
  5. King, Robert G. & Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series 1083, The World Bank.
  6. de Vries,Jan, 1976. "The Economy of Europe in an Age of Crisis, 1600–1750," Cambridge Books, Cambridge University Press, number 9780521290500, Junio.
  7. Danny Quah, 1992. "Empirical Cross-Section Dynamics in Economic Growth," FMG Discussion Papers dp154, Financial Markets Group.
  8. Atje, Raymond & Jovanovic, Boyan, 1993. "Stock markets and development," European Economic Review, Elsevier, vol. 37(2-3), pages 632-640, April.
  9. Costas Azariadis & Allan Drazen, 1990. "Threshold Externalities in Economic Development," The Quarterly Journal of Economics, Oxford University Press, vol. 105(2), pages 501-526.
  10. Makowski, Louis, 1980. "Perfect competition, the profit criterion, and the organization of economic activity," Journal of Economic Theory, Elsevier, vol. 22(2), pages 222-242, April.
  11. Benhabib, Jess & Gali, Jordi, 1995. "On growth and indeterminacy: some theory and evidence," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 43(1), pages 163-211, December.
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